Green sky thinking 

Assuming there is industry-wide consensus that a particular product or process is harmful from an environmental perspective, can competitors come together and agree to phase out that harmful product (or process) and replace it with a more sustainable alternative? Doing so may help reduce the so-called ‘first mover disadvantage’ that could deter individual business from 'going it alone”.

On this point, the CMA’s draft guidance states that as long as the decision to phase out the harmful product/ process does not involve an appreciable increase in price for consumers (or reduction in product choice) such an agreement is unlikely to have an adverse impact on competition.

The CMA gives the example of businesses agreeing to stop using a particular type of packaging and replacing it with an alternative packaging process that is more sustainable. According to the CMA’s draft guidance, this agreement would be unlikely to breach competition rules provided that the parties involved have data to show that the switch could be made without economically disadvantaging consumers in the form of higher prices/ reduced choice.

This reflects the position taken by other competition authorities. For example, in July 2022, the Netherlands Authority for Consumers and Markets (ACM) announced that it supported an agreement between six soft drink suppliers (including Coca-Cola and two supermarket chains) to discontinue plastic handles on all soft drink and water multipacks. After analysing the agreement upon the request of the suppliers, the ACM found that the agreement would not have a negative impact on consumers, either in terms of reduced quality or higher pricing.

Of course, in practice, it is quite feasible that some decisions to switch to more sustainable processes will result in higher prices (or less choice/ reduced quality) for consumers. In such cases, the businesses involved would need to conduct a careful assessment of the effects of the agreement to determine whether the exemption under s9(1) of the Competition Act is available.

The CMA gives the example of rival furniture producers who collectively decide not to import or produce furniture made from wood grown unsustainably, which results in significantly higher prices for consumers. The s9(1) exemption could be applicable in this case if consumers are in fact willing to pay higher prices for furniture made from sustainable wood because they value the indirect benefit of not contributing to deforestation alongside the more direct benefit of improved quality or longevity for the furniture. However, the CMA points out that it would expect to see clear evidence to demonstrate that consumers value those benefits (in a way that would balance the disadvantage of higher prices), for example robust consumer survey evidence.

Gathering this evidence may be easier said than done, not least as consumer sensitivities to different product attributes – sustainability versus price – may be influenced by macro-economic factors such as the cost-of-living crisis; however, the guidance suggests that the CMA is not exclusively interested in weighing one dimension against another precisely, but rather whether there is genuine consumer appetite for more sustainable solutions that are supportive of the cooperation in question.

Finally, it is also important to consider agreements of this nature from the perspective of the firms that supply the product or service that are being phased out. If the parties collectively agree (in effect) not to purchase from a particular provider because of the poor environmental impact of their products/ services, this could be viewed as a collective boycott from the supplier’s perspective. While horizontal collective boycotts of this nature can raise serious competition risks, the CMA’s draft guidance suggests that a more permissive approach will be taken when the objective of the (effective) boycott is to improve environmental sustainability and the focus is on the products themselves. This is on the basis that the purpose of the agreement would be to eliminate unsustainable products from the supply chain rather than to force a particular supplier out of the market on economic grounds. Nevertheless, such an agreement would require careful analysis of the market context to ensure compatibility with competition rules.

Increasingly, there is a push within certain industries to develop uniform standards aimed at making products or processes more sustainable across the industry.

The CMA’s guidance is clear that co-operation between competitors to develop standards or codes of practice of this nature is unlikely to have an appreciable negative effect on competition.

However, this is subject to the following conditions:

• The participation criteria must be transparent.

• Firms must not be obliged to participate in the standard if they do not wish to do so (albeit the standard may oblige those businesses who have committed to participate in the standard/code of practice to comply with the standard and may provide for a mechanism to monitor such compliance).

• It must be possible for any firm to participate or benefit from the standards/codes of practice on reasonable and non-discriminatory terms.

• Participating businesses must be free to develop alternative standards and to sell products that fall outside of such standards or codes.

• Participating businesses must be free to go beyond minimum sustainability targets set by the standard.

Businesses that wish to reduce emissions and improve sustainability within their supply chain will often find that they lack the necessary data to “grade” their suppliers according to their sustainability credentials.

In order to overcome this information gap, competitors who operate within the same market may find it helpful to pool information in relation to suppliers so that they are better placed to reach independent decisions in relation to their own supply chains. This could, for example, include information on which suppliers have sustainable production processes, provide sustainable inputs or have environmentally sustainable value chains.

This may be equally applicable for suppliers looking down the supply chain to evaluate the performance of their customers, for example in relation to their recycling and environmental disposal practices.

In both cases, the CMA acknowledges that pooling this kind of information may be permissible, although co-operating in this way can give rise to appreciable competition risks. In particular:

• the information must be strictly limited to the pooling of sustainability credentials. Competitors must not share competitively sensitive information about prices or quantities purchased from (or supplied) to the suppliers or customers in question; and

• the parties should be free to use the pooled data independently. If the agreement extends to a mandatory requirement to only deal with (or not deal with) specific parties, this is likely to require a more careful and detailed assessment from a competition law perspective.

In the latter case, if the parties were to collectively agree not to deal with suppliers who do not meet certain sustainability standards, this could be considered a form of collective boycott. As noted above (see ‘Phasing out non-sustainable products or services’) the CMA has indicated that it may adopt a more permissive approach towards collective agreements where the intention is to eliminate unsustainable practices in the supply chain, but caution is advised as this is a sensitive area.

The CMA’s draft guidance confirms that the setting of non-binding industry targets or ambitions for the whole industry with regard to environmental sustainability objectives (e.g. CO2 emissions) are unlikely to have an appreciable negative effect on competition.

This kind of agreement might include:

• the development of a common methodology (available on an open-source basis) allowing industry participants to calculate and report the emissions associated with their business activities in absolute terms; and

   

• the establishment of a common framework for target setting, including which emissions and business activities are within the scope of the common framework. The CMA points out that such a framework could allow for the unilateral setting, disclosure and reporting of the participants’ targets, as well as how – in broad terms – the participants intend to meet their targets and the participants’ progress towards meeting those targets.

As always though, the devil will be in the detail. Industry bodies and trade associations should ensure that there are no harmful ‘spillover’ (wider commercial coordination) effects on competition as a result of the increased industry co-operation in this area.

Thankfully, the CMA has indicated that it is prepared to take a more permissive approach to the s9(1) exemption under the Competition Act for what it refers to as “climate change agreements”.[1] In particular, this means that when assessing whether consumers receive a “fair share” of any benefit arising from the agreement, the parties can point to the wider benefit that all consumers receive from combatting climate change without needing to identify specific benefits conferred on the more narrow category of consumers who purchase the relevant goods or services produced in their own market.  

There may be cases where a firm wishes to launch a new R&D initiative with an environmental benefit but lacks the technical or financial resources to progress their ideas independently. Working together with competitors who are active in the same market (and may therefore be facing the same challenges) has the clear potential to benefit consumers by driving sustainable innovation in a way that would not be possible if the parties did not co-operate.

The CMA gives the example of several housing corporations participating in a pilot project to develop zero-energy housing using a novel, more efficient technology in a particular area. As the housing corporations may each individually lack the resources or capabilities to undertake the project individually, such an agreement is unlikely to raise competition concerns in principle.

The draft guidance also refers to a situation where competitors cooperate in early-stage scientific or technological research with an environmental sustainability objective. Again, if the parties have complementary skills that would enable the research to develop in a way that would not have been possible had the parties each worked independently, the draft guidance states that this is unlikely to raise competition concerns. Indeed, in some cases R&D agreements may benefit from the existing Research and Development Block Exemption Order.

It’s nevertheless important to remember that the CMA does still expect businesses to compete to drive technical innovation for more sustainable products and services. This means that when assessing the risks associated with R&D co-operation, businesses should satisfy themselves that any co-operation in this space does not undermine the ability of the parties to compete in this space.

Therefore, in all cases the businesses involved would need to be alive to the knock-on risks associated with strategic co-operation, for example by ensuring there are processes in place to ensure that the parties to do not exchange commercially sensitive information that could result in weaker competition between the parties.